Interest rates are rising and tech stocks are likely to head in the other direction

Tuesday 23 February 2021, 6:12 PM AEST - 1 week ago

The hand of a man in a suit checking the ASX website on his phone at the ASX.Analysts warn tech stocks are particularly vulnerable to rising interest rates. (ABC News: John Gunn)

We live in strange and ridiculous times. Nowhere is this more evident than on financial markets.

After blithely trading on to record highs while the seeds of a pandemic germinated in China in January and February last year, supposedly forward-looking share markets cratered when the obvious became apparent in late February and March last year.

Then, with almost as much panic as the sell-off, shares came roaring back in a speculative frenzy, leaving many markets (notably the US) hitting fresh records, even as the nations they were based in suffered their sharpest recessions since at least the Great Depression.

As is often the case, once the buying started, it seemed the less connected a stock or other asset was to an identifiable income stream the faster and higher it rose. Bitcoin anyone.

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Why?

In part, it was the forward-looking nature of markets, with early bets on the vaccines, which are only now just being rolled out, ending the pandemic.

But the biggest driving force was the unprecedented flood of money and record-low interest rates from central banks that has left the world awash with ultra-cheap cash with few financially rational places left to invest it.

When the real rate of return on 'safe' assets, like AAA-rated government bonds, is deeply negative — you are losing money holding them — the cost of parking money in assets that offer no income but the potential for speculative gains falls and the temptation rises dramatically.

Along with growing disquiet and distrust around the central bank actions that have pushed interest rates so low, these negative rates are a major reason why professional investors have been right in there with amateurs throwing money at bitcoin and other cryptocurrencies, as well as tech companies that either make no profits or generate earnings that are a fraction of their soaring share market valuations.

For more conservative investors, the perceived safety of bricks and mortar has been the investment of choice.

Rate trigger for a 'long overdue correction' < ...

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